Over the Peak – Why Peak Oil Matters

In the last few days (written 14 October 2014) the headlines have focused on the increase in oil production from OPEC producers, now at its highest level since the summer of 2013 – In its monthly oil market report, OPEC said its oil production rose by 402,000 barrels a day in September 2014 to total 30.47 million barrels a day. Higher levels of supply from Iraq and Libya were the main drivers of the production increases. Oil production is also rising due in part to the shale oil boom in North America. Whereas demand has weakened as growth falls in the global economy, this saw a 20% fall in the spot price for Brent crude over 3½ months.

From the oil industry’s point of view this all sounds very positive, growing production, a product where supply exceeds current demand. But we need to step back and look at the longer-term picture. Richard Miller and Steven Sorrell, writing in the Philosophical Transactions of The Royal Society, in an article called “The Future of Oil Supply”, say that, “The core issue for future supply is the extent and rate of depletion of conventional oil, since this currently provides around 95% of global all-liquids supply.” They say that conventional oil production plateaued in 2005 and recent increases in petroleum supply has come from unconventional sources, including tar sands and tight oil. They say that, “Crude oil production is heavily concentrated in a small number of countries and a small number of giant fields, with approximately 100 fields producing one half of global supply, 25 producing one quarter and a single filed (Ghawar in Saudi Arabia) producing approximately 7%.” Most of the giant fields are old and many have passed their peak of production, few new giant fields are expected to be found. They note that, “Future global production is therefore heavily dependent on the future prospects of the giant fields.”

From previous studies Miller and Sorrell concluded that, “a sustained decline in global conventional production appears probable before 2030 and there is significant risk of this beginning before 2020. This assessment excluded tight oil resources since these were classified as unconventional. However, on current evidence the inclusion of tight oil resources appears unlikely to significantly affect this conclusion, partly because the resource base appears relatively modest. Despite rising proved reserves, the depletion of conventional oil resources is relatively advanced.”

They dismiss any possibility that tight oil (fracking) can replace declining conventional oil output because of its relatively limited reserves (10% of the estimate for existing conventional oil reserves), high decline rates (approaching 100% p.a. in some cases) and the need to continuous drill closely spaced wells.

They conclude that “Most authors accept that the conventional oil resources are at an advanced stage of depletion and that liquid fuels will become more expensive and increasingly scare. The tight oil ‘revolution’ has provided some short-term relief, but seems unlikely to make a significant difference in the longer term.” They add, “Climate-friendly solutions to ‘peak oil’ are available, but they will not be easy, they will not be quick and they appear unlikely to allow the majority ofthe world’s population to achieve the levels of mobility currently enjoyed in the West. Lower mobility, in turn, implies a very different direction for future economic development. In sum, adapting rapidly and peacefully to oil scarcity in a manner that does not destroy the global environment provides humanity with a formidable challenge.”

Their carefully chosen words point to a profound change in the operation of the global economy, at some time in the next five to ten years. Once oil becomes scarce prices will inevitably climb, and the sub-$100 a barrel price in the later half of 2014 will be a distant memory, like petrol at 25C a gallon in the United States in the 1970s.

We need to be planning for the post-oil future, one where electric cars are the main personal mode of transport (or bicycles in the city), and high speed trains replace aircraft. We are approaching an inflexion point, after which things will never be the same. The world will be one in which travel is increasingly expensive and therefore restricted, where the price of food and other essentials which rely on cheap hydrocarbons, increases and the problem becomes of managing a declining and deflationary economy.